The International Monetary Fund says that this is a good time for countries to increase their spending on public infrastructure. It also claims that the short-run boost to aggregate demand and the long-run boost to aggregate supply would be large enough that "public infrastructure investment could pay for itself if done correctly." Mankiw thinks this last claim is wishful thinking.

Public debt in many countries is too high and should be reduced. The problem is that the policy changes necessary to reduce debt (less spending and higher taxes) slow growth. Yet there is also reason to believe that high debt itself can slow growth. Olivier Blanchard and Daniel Leigh weigh the options.

A short video discusses the difficulty of reducing the federal budget deficit. To force itself to do so, Congress created a scenario where if it did not get the deficit under control, fiscal policy would automatically turn sharply contractionary.

How can governments reduce their deficits without causing a serious recession? Research by Alberto Alesina, Carlo Favero, and Francesco Giavazzi suggests that spending cuts are less harmful than tax increases.

Lawrence Summers is skeptical that reducing already low interest rates will stimulate investment spending. He recommends that the government take advantage of low interest rates to accelerate public investment projects that have a positive real return to the economy.

The CBO forecasts that, compared to current law, the president's proposed budget will increase output from 2013 to 2017, but will reduce it after that. It illustrates the short-run ability of fiscal policy to boost growth and the long-run crowding out of productive investment by government borrowing.

Martin Feldstein notes that bank excess reserves have increased dramatically over the past few years, but bank deposits have not. If banks decide to start lending those excess reserves, the money supply could grow rapidly.

The Washington Post discusses a school of thought called "Modern Monetary Theory." Its basic premise is that governments can never run out of money because they can print it. Moreover, governments should use that ability to increase spending.

The head of the European Central Bank promises to have loose monetary policy if European governments enact contractionary fiscal policy. That will allow Europe to tackle its debt problems without causing a recession.

An hour-long video shows Mankiw's recent lecture at Princeton. In a wide-ranging presentation, he discusses the current state of macroeconomics. In the process he addresses the policy difficulties created by the current slump and the long-term debt crisis.

Mankiw's new paper suggests that fiscal policy is not necessary to stabilize the economy unless the Fed hits the zero lower bound on nominal interest rates AND cannot commit to future monetary policy actions that would boost present demand. When fiscal policy is required, tax changes that boost investment might be preferred to increases in government purchases.

A recent proposal would allow people with government-backed mortgages to refinance them at today's lower interest rates. Proponents claim it is a cost-free way to boost the economy. Edward Glaeser argues that it will not boost the economy and it will cost taxpayers a lot of money.

Gauti Eggertsson notes that policymakers in 1937 confused a rise in the relative prices of commodities for fundamental inflation. The result was bad policy decisions. He wonders if modern policymakers will make the same mistake.

A White House press release included a portion of Mankiw's blog from December 7 about the tax deal reached between President Obama and Congressional Republicans. Mankiw had said that he was generally pleased with the deal.

Mankiw discusses the tax deal reached between President Obama and Congressional Republicans. He argues that it is a good deal that will help stimulate the economy. Mankiw also endorses the Simpson-Bowles plan to reduce the long-run deficit.

Simon Johnson and Greg Mankiw discuss the tax deal reached between President Obama and Congressional Republicans. Johnson fears that the deal adds too much to the tax deal. Mankiw argues that it is positive for the short run, but that the administration needs to get serious about reducing the deficit in the long run.

The Tax Policy Center looks at the numbers behind the tax deal between President Obama and Congressional Republicans. The numbers show that the deal is progressive when compared to current policy, but regressive when compared to what would happen if the Bush-era tax cuts were allowed to expire.

Martin Feldstein argues that the anticipated second round of the Fed's quantitative easing will do little good and might do much damage. In particular, it may create asset bubbles and create volatility in the currency markets.

The conventional wisdom is that a fiscal contraction will cause GDP to contract in the short run. Yet spending cuts that restore confidence that deficits are not out of control might not have an adverse effect on GDP.

The Obama administration is proposing that, for tax purposes, investment expenditures be expensed as they occur as opposed to depreciated over time. That should have a small but positive impact on investment.

Mankiw suggests that some of the political friction on world trade issues stems from a failure to understand a trilemma: A country cannot have free flows of capital, a stable exchange rate, and the ability to use monetary policy to stabilize the economy. It must give one of them up.

Christina Romer, chair of the President’s Council of Economic Advisors, discusses the parallels between the crises of 1929 and 2008. She argues that the policy response to the current crisis has been much better than the response in 1929.

Robert Gordon argues that modern dynamic stochastic general equilibrium models are not relevant to the real world. He suggests a return to a Keynesian model, but one stripped of the short-run Phillips Curve.
Textbook References:
Chapter 33 “Aggregate Demand and Aggregate Supply”
Chapter 34 “The Influence of Monetary and Fiscal Policy on Aggregate Demand”
Chapter 35 “The Short-Run Trade-off between Inflation and Unemployment”
Chapter 36 “Five Debates over Macroeconomic Policy”

Blogger Mark Thoma uses a speech Mankiw gave six years ago to defend Obama’s deficit spending. But Mankiw’s speech emphasizes that a deficit caused by spending may have a different long-term effect than a deficit caused by tax cuts.

There is an article that summarizes how the current crisis started, how it spread and the actions taken to counteract it. There are also links to a large number of articles and videos on the same topics. This should be an especially valuable resource for instructors.

Allan Meltzer is worried that the Fed’s easy money policy will lead to inflation. He is also worried that the Fed has lost its independence. Paul Krugman is worried about falling wages and the possibility of deflation.

Robert Murphy responds to Mankiw’s argument that we need negative interest rates. He points out that Mankiw’s argument for future inflation is logically equivalent to an instantaneous collapse of prices. Mankiw points out that if prices are sticky, that can’t happen.

Robert Solow reviews Richard Posner’s book, A Failure of Capitalism: The Crisis of ’08 and the Descent into Depression. Along the way he provides insightful observations, as one would expect from a Nobel laureate.

The U.S. wants China to keep buying our treasury bonds, which has the effect of keeping the value of the dollar high against the Yuan. But the U.S. also wants China to raise the value of the Yuan against the dollar.

Textbook References:

Pages 692-702 “The International Flows of Goods and Capital”
Pages 724-733 “How Policies and Events Affect an Open Economy”

There are links to two newspaper articles by Martin Feldstein. In the first he makes a case for a fiscal stimulus. In the second he argues that the current fiscal stimulus proposal is poorly put together and will not have the intended effect.

David Brooks argues that Larry Summers has advocated a stimulus plan that is temporary, timely and targeted. Yet despite Summers becoming an economic advisor to Obama, the proposed fiscal stimulus contains large permanent, untimely and untargeted provisions.

Robert Barro argues that the proposed stimulus package ignores what have economists have learned since 1936. There is also a link to Paul Krugman’s blog where he chides Barro for misrepresenting Keynes.

There is a link to an editorial by Ed Glaeser that argues that the stimulus should be focused on ordinary people. That implies that a cut in the payroll tax would be better than large construction projects that disproportionately help owners of big construction firms.

There is a link to a report by Glen Rudebusch about the unconventional monetary policy that the Fed has employed. It is necessary because the conventional method of cutting interest rates is no longer possible.

Mankiw reports that Obama’s economic team holds the orthodox position that the government spending multiplier is bigger that the tax multiplier. That runs counter to recent research by Christina Romer and David Romer.

There is a link to a blog by Eugene Fama and Ken French. Fama discusses the problem of how government injections of equity capital into troubled financial institutions can easily become nothing more than subsidies to debt holders.

There is a link to an editorial by Glenn Hubbard and Chris Mayer that argues in favor of more government action to reduce mortgage interest rates. There is also a link to an editorial by Ed Glaeser and Joe Gyourko that argues that such a policy is the cause of the current crisis.

Data from the U.S.Treasury suggest that the real interest fell two points in a few days. Mankiw says it’s a figment of how the data are constructed.

Textbook Reference:

Pages 539- 541 “Real and Nominal Interest Rates”

Dec. 1

Fiscal Policy Puzzles

Recent empirical work suggests that unexpected deficit-financed tax cuts have a bigger effect on the economy than an equivalent deficit-financed increase in government spending. This result runs counter to the standard Keynesian model.

How much should we worry about the government’s debt? Should we prefer creative monetary policy to fiscal policy? There are links to non-academic articles by Dean Baker, Paul Krugman, and Greg Mankiw as well as a speech Ben Bernanke gave in 2002.